New FLSA Overtime Rule Will Impact Employees – Steps Employers Need to Take Now

On May 18, 2016, President Obama and U.S. Department of Labor Secretary Perez announced the publication of the Department of Labor’s final rule updating the Fair Labor Standards Act and overtime regulations. These final rules have been approved after the proposed regulations were first published on July 6, 2015 followed by the required comment period. The final rule takes effect on December 1, 2016.

By way of general background, the Fair Labor Standards Act (FLSA) requires overtime pay for non-exempt employees (hourly) when they work in excess of eight hours in a day or forty hours in a week. There are positional exceptions to this overtime requirement called “exemptions” which is where the label “exempt” (salary) employee comes from. There are certain qualifications or legal “tests” to determine whether a particular person duties appropriately qualifies for the exempt status. The most common exemptions are the “Administrative”, “Executive”, “Professional” (learned and creative), “computer” and “outside sales.”

One of the qualifying criteria for the exempt status is called the “salary basis” test. This is a minimum salary threshold that must be met to qualify. Currently an employee must be compensated at a rate of not less than $455 per week. This is in addition to meeting the specific criteria necessary for each particular exemption. For example, an employee classified as “exempt” based on the Administrative exemption must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. There are other factors that must be considered for this particular exemption as well.

Highly compensated employees (HCE) performing office or non-manual work are also exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee. These are usually specialized employees that meet some of the exempt “tests” or criteria but not all of them. Currently an employee that earns $100,000 or more per year qualifies for this broader exemption.

Effective December 1, 2016, the salary basis test and the HCE will change.

The minimum salary to qualify for the exempt status has been increased to $913 per week ($47,476 annually). If you have employees that are currently exempt but earn less than this amount – they will be improperly classified effective December 1, 2016.

Furthermore, the HCE amount has been increased to $134,004 annually as well. Accordingly, if you have salaried employees that make less than this amount and they do not meet all of the elements required for a particular exemption status, they too will be improperly classified effective December 1, 2016.

So, what steps do you need to take?

First, you must identify those salaried employees that earn less than $913 per week. If you have employees that fall into this category you have several options:

1.    Increase their salary to the minimum; or
2.    Convert them to non-exempt and pay them hourly.

Of course reorganizing or modifying job duties along with the above options must be considered as well.

Second, identify those employees that currently are classified as exempt and earn in excess of $100,000. You need to reevaluate their job duties and responsibilities to see if they meet all of the elements of a particular exempt status. If they don’t, you either have to adjust salary or convert them to a non-exempt status. Employees that fall into this category will be relatively rare.

Richard Birdsall, J.D. is a Senior Associate at The Growth Company, Inc. You can follow him on LinkedIn and Twitter.

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